To Get Big, You’ve Got to Think Small

By Frank Demmler

Let’s return to one of the basic themes of this series: Risk vs. Reward.

As a first-time entrepreneur, you must be able to look at yourself and your business from the perspective of those from whom you want assistance, particularly investors. You’ve read the business planning books, and you know that you need to develop a plan that shows that you can become a big business. In your mind,

big business = big market

which in turn leads you to build your plan around penetrating a market potential of hundreds of millions, or even billions, of dollars. Sound familiar?

With that premise, your business plan may contain a declaration that looks something like this:

“By capturing 0.5% of the market, we will achieve our conservative sales forecasts. At the same time, we won’t be on the radar screens of the major players and won’t be subject to any competitive pressures.”

Red flags are raised! Alarm bells go off! Risk meter pegs out! Ding! Ding! Ding! Plan goes into the wastebasket!

That was quick (perhaps less than 20 seconds). What happened?

Investor Requirement #1: You’ve got to know your market

An investor will want to be comfortable that you understand the dynamics of your chosen market and that you can successfully build a business. How do you capture 0.5% of a market? If the investor were to provide you with the requested capital, what are the first three things you would do? Advertise? Hire a field sales force? How do you measure your progress?

The point I’m trying to make (and probably doing it poorly) is that a target of 0.5% market share tells an investor that you don’t really understand your market. In addition, it doesn’t give you the kind of focus that he knows you’ll need to be successful.

All of this adds up to risk that in the opinion of the potential investor may be enough to reject the investment opportunity without going any further.

Investor Requirement #2: You’ve got to have a practical business development strategy

You do need to build a case that your overall market is of a significant size so that you have an opportunity to build that big business that investors seek. You need “sex and sizzle” to attract the attention of the sophisticated investor. But once you’ve done that, you have to think small to get big. Let me explain.

Your challenge at this point is to determine meaningful market segmentation parameters so that the overall market can be divided into market segments. Next you have to define the niche within that segment that you will successfully penetrate because the members of that niche have specific needs that you can uniquely satisfy.

Bear with me. I’ll walk through an example that I think will help you “get” this.

Investor Requirement #3: You need a plan that you can execute

As noted above, a target of a market share of 0.5% doesn’t give you much help in conceiving of and developing a plan that you can execute. But, if you do a good job of identifying your niche, you can develop such a plan.

An investor will want you to be able to answer the following questions:

· Who are your immediate prospects, by name?

· Why is each likely to buy from you?

· What individuals in the prospect company will be involved in the purchase decision and what role will each play?

· How long will it take to receive a firm order?

· How many prospects will become customers in the first three, six, nine and twelve months?

You can answer these questions if you are focused on a niche. You can’t if you’re trying to get 0.5% of a market.

An Example: Automated Healthcare, Inc.

Sean McDonald, founder and former CEO of Automated Healthcare and current CEO of Precision Therapeutics, taught me these lessons. When I think back on those early days of the company, I marvel at his audacity and wonder how the heck he ever convinced me to lead the investment in his company. In essence, Sean said, “I’m going to sell robots to hospitals for $1 million,” and I believed him!

In 1990 there were close to 8,000 hospitals in the United States (or so I recall, perhaps in error). That’s a pretty well defined market, but not very useful. Of those, less than 1,000 had more than 400 beds, which meant that they were big enough to justify and use a robot. And so it went, until he had defined a universe of perhaps 25 hospitals that met the company’s requirements. Among those requirements were:

· Hospitals in which the director of pharmacy was a significant player.

· Hospitals in which pharmacy directors would “get it” (the inherent benefits of automation and barcodes).

· Hospitals whose purchase of the AHI product would give the company credibility and would serve as references to other hospitals.

Of the company’s first ten customers were four of the past five presidents of the American Hospital Pharmacy Association. Now, that’s a niche! The company’s success with this initial batch of customers provided the foundation from which a broader market segment could be accessed.

The company was sold to McKesson in 1996 for $65 million, and I believe that McKesson Automation has over 800 hospital customers today.

To get big, you have to think small.

Summary

• The identification of a large market is necessary to attract institutional investors.
• Identifying a niche is necessary to formulate an effective commercialization plan.

• You build your business one customer at a time.
• Initial customers need to enhance your ability to attract future customers.

Frank Demmler is Associate Teaching Professor of Entrepreneurship at the Donald H. Jones Center for Entrepreneurship at the Tepper School of Business at Carnegie Mellon University. Previously he was president & CEO of the Future Fund, general partner of the Pittsburgh Seed Fund, co-founder & investment advisor to the Western Pennsylvania Adventure Capital Fund, as well as vice president, venture development, for The Enterprise Corporation of Pittsburgh.